Debunking the Insurance Bad Faith “Setup” Myth

When insurers fail to act fair and reasonable when adjusting claims or otherwise dealing with policyholders, the insurer can be liable for damages separate and apart from contract damages. Every insurance company owes its insured a fiduciary duty. This duty arises out of a number of policy considerations that include the necessity for all individuals and businesses to carry insurance coverage, the degree to which the settlement of claims are controlled by the insurer and the imbalance in bargaining power between the insured and policyholders.

Bad faith insurance claims can be rooted in either a common law or statutory basis, and the types of conduct that can amount to bad faith include dozens upon dozens of types of conduct, such as failure to property investigate a claim, refusing to accept a reasonable settlement of a liability claim, delaying payment, declining to pay the full value of a claim and a multitude of other types of practices.

The justification for bad faith claims can be understood best based on their applicability to third party liability claims, which is where the common law cause of action in Florida originated. The insured has virtually no involvement in adjustment of the claim. The insured determines the type of coverage and coverage limits. The insured’s only other significant role is to pay premiums. The entire adjustment process, litigation of the claim and settlement decisions are made by the insurance company.

The insurer exercises almost exclusive control over the litigation and settlement process which necessitates imposing a duty of good faith and fair dealing on the insurance company. If such a duty were not imposed, the insurance company would have virtually no incentive to settle cases within policy limits to avoid exposure of the insured's personal assets.

Individuals and entities who lobby for the insurance industry in Florida have been advocating for changes in insurance bad faith law based on the theory that policyholders can “setup” bad faith claims. The notion of insurers setting up bad faith claims are generally rooted in two situations: (1) use of unreasonable deadlines; and (2) settlement demands that render a proposed settlement completely beyond reasonable consideration.

Both of these examples are really fabricated scenarios that misconstrue bad faith situations. If an insured imposes unreasonable deadlines for responding to settlement demands, insurance companies will not be found in bad faith when insurance companies are not given sufficient time to investigate the claim. Similarly, courts will consider the tactics and fairness of the insured when assessing a bad faith claim, so proposing demands that cannot reasonably be considered will not setup an insurance company. The insurance company will be evaluated on whether it properly investigated the claim and engaged in reasonable efforts to settle the claim. If the insurer has done so, its adjustment and settlement process will not be considered bad faith.

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